Separability of stochastic production decisions from producer risk preferences in the presence of financial markets

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Separability of stochastic production decisions from producer risk preferences in the presence of financial markets

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Robert G. Chambers () (Dept of Agricultural and Resource Economics, University of Maryland, College Park)
John Quiggin () (Department of Economics, University of Queensland)

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Abstract

Separation results, as they are usually understood, refer to conditions under which a firm's production decisions are independent of its risk attitudes. Well-understood situations where separation occurs typically include those where technically feasible production opportunities are replicable in financial markets. This paper gives necessary and sufficient conditions for separation that go beyond these well-understood spanning conditions. To do so, we present a unified treatment of the production and financial decisions available to a firm facing frictionless financial markets and a stochastic production technology under minimal assumptions about the firm's technology and objective function.Our main analytical tool is the derivative-cost function, which gives the minimum cost of achieving a state-contingent return vector through a combination of production choices and trade in financial assets.

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Paper provided by Risk and Sustainable Management Group, University of Queensland in its series Risk & Uncertainty Working Papers with number WPR03_4.

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Date of creation: Sep 2003
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Handle: RePEc:rsm:riskun:r03_4

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D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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John Quiggin & Robert G. Chambers, . "The state-contingent approach to production under uncertainty," Risk & Uncertainty Working Papers WP1R05, Risk and Sustainable Management Group, University of Queensland. [Downloadable!]

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